Cogeco Communications (TSX: CCA) stock fell 20% in 15 days after the company released its earnings for the second quarter of fiscal 2026, ending February 2026. Trading closer to its 52-week low of $61, this beaten-down TSX stock still has value. It could be a dividend stock for the long haul, provided its three-year transformation plays out.
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The value of Cogeco in the telecom space
The Canadian telecom sector underwent a reset in 2024 after the regulatory change encouraged price wars. In the last two years, prices fluctuated and finally normalized as markets arrived at a price below which providers won’t go. The biggest beneficiary of the price war was Mobile Virtual Network Operator (MVNO) Cogeco, which runs an asset-light business model. Instead of pouring billions of capital into fibre infrastructure, it leases infrastructure from giants like BCE and Telus.
The MVNO model reduces the risk of high leverage and gives the operator flexibility to focus on sales and marketing and on enhancing its services. Cogeco’s advantage phased out gradually and ended in March 2026 as prices normalized. While BCE and Telus rejoiced as their average revenue per user decline slowed, Cogeco revised its 2026 revenue projections to a 2-4% decline from the previous forecast of a 1-3% decline. This revision pulled the stock down.
Is the downtrend over for this TSX dividend stock?
Cogeco is expecting revenue to decline further as consumers shift from wireline and TV subscriptions to Internet-only services. The video and wireline communications segment makes up almost half of Cogeco’s revenue. Cogeco entered Canada’s and America’s wireless markets in July 2025 and 2024, respectively. These services will gradually increase their contribution to Cogeco’s revenue.
To take a leap, Cogeco has to take two steps back. In the meantime, it is reducing its debt. If we break down the second-quarter earnings and think from a long-term perspective, Cogeco is on track to grow its free cash flow (FCF) anywhere between 0% and 10%.
Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) fell 5.3%, but net profit and free cash flow grew 5% and 33% on a year-over-year basis. This change was due to an accounting adjustment. It shifted $1.8 million of technology licensing costs related to Canadian wireless operations to operating expenses, which are deducted to arrive at EBITDA, instead of other costs. That accounts for the 5% dip in EBITDA and 5% jump in net profit.
Since this accounting arrangement reduced EBITDA, its net leverage ratio increased from 2.9 times to 3.2 times its adjusted EBITDA despite the company reducing its debt from $4.5 billion to $4.28 billion.
Cogeco’s FCF increased as it reduced its capex from 21.6% of revenue in the second quarter of fiscal 2025 to 17.6% this year. To address the 5% revenue dip, Cogeco has increased its sales and marketing expenses. Its impact will be visible towards the end of the year. The accounting adjustment will continue to affect the second half of the earnings, and the stock price could remain weak.
What to expect from this TSX dividend stock in the long haul?
However, the dip is a buying opportunity, as it has inflated the dividend yield to 6.14%. Its dividend payout ratio is 30% of FCF. Considering a 10% FCF growth, the company can continue growing its dividend by 7-10% without disturbing the payout ratio.
Cogeco is a better dividend stock than BCE and Telus, as the latter two are investing heavily in artificial intelligence (AI) infrastructure. This has disrupted their restructuring plan to reduce debt and strengthen free cash flow. The high capital spending will keep dividend growth paused and could also push Telus onto BCE’s path to dividend cuts over the next two years. Once the AI data centres come online by the end of 2027, investors can review the return on investment and decide on further investments.
